Climate change – coming to a portfolio near you

Posted July 25, 2017

David Worsfold

What happened to all that fuss about insurers contributing to the global action to reduce the impact of climate change?

In the wake of the ground-breaking agreement at the end of the Paris Summit in December 2015 – the 21st Session of the Conference of Parties (COP21) – the role of insurers as investors in renewable energy and a range of green initiatives was high on the post-summit agenda. The scale and influence of insurers in global investment markets was highlighted as having the potential to make a major contribution to delivering the objectives of the Paris summit.

The Geneva Association quickly identified this as a key outcome, saying the four year ratification process would see more and more being asked of insurers: “It seems inevitable that by 2020 the (re)insurance sector will not only be providing a wider range of risk-transfer solutions but also be supporting emission reduction efforts and transitioning to a low-carbon economy through its investment strategies as well as actively managing its carbon footprint”, it said in a lengthy review of the summit.

Since then, of course, much has been made of the announcement by President Trump that the USA will be withdrawing from the Paris agreement, although how and when that will be done has yet to be clarified. European leaders, on the other hand, have made it clear that they will not be deflected from delivering the ambitious objectives they agreed in Paris.

The European Commission set up a High-Level Group on Sustainable Finance in December 2016. Despite taking almost a year to set up this group, chaired by Christian Thimann, Axa’s group head of regulation, sustainability and insurance foresight, it has moved quickly. In addition to Thimann as chair, the group comprises 20 experts from civil society, the finance sector, academia and observers from European and international institutions.

It published its interim report on 18 July at a public hearing in Brussels. This is out for consultation until mid-September with a final report expected by the end of the year.

At the public hearing, Thimann set out the scope of his group’s work: “Sustainable finance is about two imperatives: the first imperative is to improve the contribution of finance to sustainable and inclusive growth, funding in particular society’s long-term needs for innovation and infrastructure, and accelerating the shift to a resource-efficient and low-carbon economy.

“The second imperative is to strengthen financial stability and pricing in financial markets, notably by improving the assessment and management of long-term material risks and intangible drivers of value creation – including those related to environmental, social and governance (ESG) factors.

“In short, sustainable finance means ‘better development’ and ‘better finance’ – growth that is sustainable in each of its economic, social and environmental dimensions; and a financial system that is focused on the longer term as well as material ESG factors”.

The interim report set out six key recommendations that it wants feedback on from the industry and other interested parties

• A classification system for sustainable assets
• A European standard and label for green bonds and other sustainable assets, and labels for sustainable funds
• Fiduciary duty that encompasses sustainability
• Disclosures for sustainability
• A sustainability test in financial legislation
• Create ‘Sustainable Infrastructure Europe’

Insurance Europe, the trade body for European insurers, was quick to respond to the report. Speaking after the hearing, Michaela Koller, director general, said “The insurance industry stands ready to engage with European policymakers and to support their objectives.

“The group correctly identifies the insurance sector, with its long-term investment focus, as particularly suited for supporting sustainability. Our industry has already demonstrated its interest in long-term sustainable assets. However, as the group notes, insurers’ willingness and ability to invest in sustainable assets is not matched by the availability of suitable projects. Given the lack of sufficient supply of green assets for insurers to invest in, it is important to avoid automatic penalisation of brown assets.”

IE strongly supports the group’s recommendation that further policy discussion is needed around Solvency II, so that areas of it are “adjusted to facilitate long-term products and long-term investment, and to reduce pro-cyclicality”. In particular, it welcomed the identification of what it describes as “incorrectly designed prudential and accounting frameworks, which do not reflect the business models of insurers and create investment disincentives”.

The work of this group is unlikely to disappear below the policy horizon as one of its key members is Bianca Jagger, in her role as a Council of Europe Goodwill Ambassador. She told the audience at the public hearing that the financial sector could no longer pay lip-service to meeting the huge challenges of climate change.

“We need a revolution in our thinking, a revolution of our financial institutions. Instead of behaving as if the world of money operates without consequences for lives, livelihoods and the environment, all investment should take into account environmental social and governance externalities.

“We must move away from our obsession with profit, efficiency and growth based on incomplete price and cost metrics, and focus instead on sustainable profit and growth based on full economic, social and environmental value. It is not only a question of moral responsibility and economic justice. The recommendations contained in the report will not only be beneficial and profitable for all – they will be critical for our survival”.

Climate change and the response of the financial sector has a prominent position on the agendas of European politicians and regulators and it will only gather momentum as Europe asserts its leadership in this field.

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